Brazil is the world’s fastest-shrinking major economy. Take a minute to reflect on that fact. It’s not China, which would appear to be in the grip of an economic recession. It’s not any number of Western European nations, still attempting to climb out of the pit which was opened by the financial crisis almost a decade ago.

Endemic Corruption in Congress

The political situation in Brazil is extremely volatile at the present time. A serious attempt to impeach the current President, Dilma Rousseff, passed the lower house of Congress earlier this week. But the alternatives to Ms. Rousseff do not look particularly promising. Her predecessor (and some say possible successor) Lula da Silva, is dealing with corruption charges of his own – as is Ms. Rousseff’s deputy, rival party leader Michael Temer. Brazil’s legislature is steeped in corruption; staggeringly, over half of the Brazilian congress are currently being accused of one form of corruption or another, taking the meaning of ‘endemic’ to a new level.

Much of the current scandal centres around the criminal misappropriation of major sums from the state-owned oil company, Petrobras. Money diverted away from its operating budget has left the firm a shadow of its former self, as well as leading to tens of thousands of people laid off as a result.

Brazilian Banks – Surprising Resilience?

However, one rather surprising element of the Brazilian economy is the resilience of Brazil’s banks. Brazilian banks such as Itau and Banco Santander have been amongst the strongest bank stocks so far in 2016. However, there are some concerns that this outward sign of strength is in fact a bubble. Moody’s wrote a note to that effect earlier this month, discussing the possibility that the restructured loans of such banks may ‘mask rising asset risk.’ Many of the largest banks are state-owned, and a government weighed down by a budget deficit of over 10% will be unlikely to be able to afford to re-capitalise them.

The Brazilian Stock Market

The Brazilian stock market (the Sao Paulo SE Bovespa Index) is up by more than 23% in the year-to-date, but a recent Forbes article went so far as to warn would be investors not to be ‘blinded by the anti-Dilma euphoria claiming the stocks are up because Dilma’s going down.’ A number of long-term big-name investors in Brazil have recently been packing their bags, amongst them Bill Gross, head of the $1.3 billion Janus Global Unconstrained Bond Fund.

Coup or Legitimate Impeachment?

In another peculiar twist, Ms. Rousseff has announced that she is being subjected to a coup, will be heading to the United Nations in New York to seek international support for her Presidency, an almost unheard of step for a Democratic leader (ironically, this will leave her Vice-President and the man she has blamed most for her current circumstances, Mr Temer, as acting President). However, Brazilian supreme court justices have made it clear that the impeachment process up until this point has been entirely constitutionally sound. In any event, the somewhat remarkable situation in Brazil right now suggests that any potential investors in what is still by quite a margin South America’s largest economy should act with extreme caution.

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